• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain the meaning of the term 'inflation'.

Extracts from this document...

Introduction

UNIVERSITY OF SALFORD Name: SZE WAH, LEUNG Student Number: @00081259 Course: International Foundation Year Subject: International Foundation Year Macroeconomics Question: 2 Question 2a) Explain the meaning of the term 'inflation'. Along with the development of society more and more problems are brought to our attention, one of which is that 'inflation'. Nevertheless, with the advance of the human civilization, the living standard increases gradually so the price index and Retail Price Index (RPI) rise gradually as well. Deep down, 'inflation' means a persistent increase in all money prices over a period of time which is generally considered to bring costs to society is the form of material, political and psychological costs. Also, the increase must be sustained at some rate before there is inflation and when the price level increases steadily over time. 'Inflation' that is to say, it is decrease in the purchasing power and all money prices to the same extent. In economic, inflation is measured as a percentage change in the PRI over a given period of time, for example, if the RPI increases from 100 to 200 in a year, then inflation is said to have increased by 20% that year. In the UK, the Retail Prices Index is most commonly used measure of inflation. Because RPI is measure the cost of living index, it can reflex the money price level such as through the changes in the prices of goods in the shops by households. ...read more.

Middle

It exist is due to excess demand. It means that the resources are not completely sufficient the different regions and sectors of the economy. Demand inflation means the higher aggregate level of activity, the large proportion of areas and industries which experience excess demand for goods and labors of various sorts. Generally, we can know that increase in aggregate demand will cause higher prices and it bring to the society of cost inflation as well. However, cost-push inflation is reverse of demand-pull inflation. Cost inflation is due to increase the factor input cost such as imported goods and raw materials so that cause to raise the prices or wage rates round the economy. Basically, the costs increase would cause the manufacturer to raise prices, soon afterwards, increases in prices cause workers to demand higher wages as well. So the cumulative effect of all these processes cause of passed on in higher prices to consumers and the cost-push inflation is extremely difficult to stop finally. Question 2c) Suggest how a government might tackle inflation. In economics, there are four ways of dealing with inflation. Fist, government can adopt tough incomes policies to keep inflation under control. Second, government can through institutional and constitutional reform to tackle inflation like as fiscal and monetary policies. Third, government can adopt indexing deal with inflation as well. ...read more.

Conclusion

From figure 2c, which express the price level decrease from P1 to P2 due to the Central Bank increase in interest rates, there is evidence that once increase in interest rates would cause to decrease the aggregate demand as well. To put it more simply, there is also indication that rise in interest rates may exert a downward pressure on prices. Figure 2c: A rise in the rate of interest effect. Third, the government can adopt indexing to tackle inflation. Whereas indexation might automatically adjusts nominal contracts for the effects of inflation, any unanticipated inflation and inflation effect can be tackled. For instance, wage rates, pensions, interest payments on bonds, income taxes and many other things can be indexed in this way. Indeed, the purpose of indexing is to reduce the social cost of inflation. However, everything has a good side and a bad side, and indexing is no exception. Some economists worry about that people would diminish the confidence combating inflation even all prices and terms in contracts will be adjusted according to the price index. Historically, indexation has already been introduced in countries that have had to live with inflation rates of 30 or 40 per cent for years. Finally, there are many ways might tackle inflation for government. Income policies, institutional and constitutional reform with fiscal and monetary policies and indexing are the process to tackle inflation efficiently. Course: International Foundation Year Macroeconomics - Assessment Essay Semester 2 Student Name: Sze Wah, Leung Student ID: @00081259 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    'The trade deficit on goods in the first three months of the year was ...

    4 star(s)

    If domestic producers have insufficient capacity to meet rising demand from consumers, then imports of goods and services will come into the country to satisfy this excess demand. As a result the current account will worsen. Poor price and poor non-price competitiveness could trigger this problem as well.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    Hence, employers are able to reduce their cost of production and hence getting a higher profit. Since higher profit is generated, there will be more production. Higher profit may lead to increase in GDP; help economy of Malaysia reaches a higher level.

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    It is known as Bottleneck or Structural Rigidity Inflation. This is more realistic as it shows that the closer an economy gets to full levels of employment more shortages start to appear in areas such as raw materials, trained and efficient labour and the production of the finished product.

  2. With the aid of diagrams, illustrate the causes if inflation and deflation, and by ...

    'These extra trips to the bank are often called 'shoe-leather' costs of inflation.' (Griffiths, A. and Wall, S., 2004, p463) The other cost of anticipated inflation is 'menu' costs. Menu costs are costs from having to update catalogues, menus, vending machines, etc (Atkinson, B.

  1. Budget 2004-05 and Economic Analysis of Pakistan

    Tax Revenue (CBR) 510000 510000 580000 Direct Taxes 161100 161500 181900 Income Tax 154200 154638 174362 Capital Value Tax 700 600 650 W. W. Tax 6200 6262 6888 Indirect Taxes 348900 348500 398100 Customs Duties 78100 86600 103200 Sales Tax 223100 218400 249200 Federal Excise 47700 43500 45700 b )

  2. Discuss the idea that if the economyis to prosper in the long run, the ...

    These costs could, of course, be avoided if interest were paid on cash balances at the same rate as the rate of inflation. An economy facing inflation, even if it is fully anticipated, will be required to frequently change nominal values in order to keep the structure of relative values unchanged over time.

  1. Why does smoking lead to an external cost?

    Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry. Other forms of protectionism include policies in some countries to buy only domestically produced goods, taxes which impose a tax burden upon the consumer, they can be ad-valorem which

  2. Unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand

    of payments is moving into deficit The second phrase is a slowdown or recession which occurs when real GDP continues to expand but at a reduced pace and aggregate demand decreases. Consequently, unemployment begins to rise and economic growth start to have an up-ward trend however the effects on the

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work